7/16/2009 @ 2:20PM

Spotify Looks For A New Tune

The way Americans listen to music online might be about to change. Music-streaming Web site Spotify, an online software program that gives Internet users instant and free access to more than 5 million songs, is set to launch in the U.S. later this summer, following its rapid acceptance in Europe. Part of its popularity is its easy format. Type in the name of any artist or album or play list, double click on your choice andprestounlimited streaming.

With 2 million users in the U.K., and about 4 million users in Europe, Spotify has found a novel way to deal with the problem of piracy (charging nothing for basic membership) and keeping music labels happy (by giving most of its revenue to finance the licensing of artists). It pulls in sales by selling ads in the traditional way radio stations do and by offering premium subscriptions–ranging from 99 pence ($1.62) a day to 9.99 pounds ($16.40) a month–that allow users to block all ads and receive audio streams of 160 kilobits per second for free subscriptions and audio streams of 320 kilobits per second for premium subscriptions. It will also start selling individual tunes to members.

Co-founded three years ago by Swedish computer programmer Daniel Ek, now 26, Spotify “is something I have been thinking about for years and years.” Ek, who started programming computers at age 13, didn’t go to college. Instead, he founded three Web companies he sold off after the dot-com implosion. He and co-founder Martin Lorentzon, one of the co-founders of the online ad company Tradedoubler, each invested 4 million euros ($5.6 million) to start Spotify three years ago and together still hold a majority of the company; a couple of venture capital funds (NorthZone Ventures and Creandum) own smaller shares. The music site launched in the U.K. in February, 2009.

“If you look at the market today, who knows where it’s going to be in the next two, three years?” Ek says. “We are doubling our revenues month-on-month–thats a very good sign.” He’s coy about just how much money that is, or how much he’s spending to operate the site, but predicts the premium service will break even by the end of the year. As for all of Spotify? He doesn’t know–and says he doesn’t care–when the company will post its first profits. “The only thing thats generating any significant revenue, Ek adds, “is the licensing.”

Ek managed to convince the four major record labels–Universal,
Sony
, Warner and EMI–which represent roughly 80% of all commercial music–to become European partners. Spotify has also signed deals with 20,000 independent labels: Most of them have come knocking at Spotify’s doors through online label aggregators, as labels opt to be part of Spotify’s network. Still the online market represents only 5% of the total music downloads–the rest, staggeringly, is accounted for by illegal file sharing.

Apple
‘s iTunes, of course, has attacked piracy by charging from 79 cents up to $1.29 per download, giving 60% to 70% of those revenues to the music company. The Cupertino, Calif. company isnt about to cede ground to Spotify, though. (
Apple
declined to comment on this story.) “It’s been really tough for players to take market share from iTunes because many people who use it are familiar with the interface and use it to put music into their iPods,” says Sonal Gandhi, a digital music analyst at
Forrester Research
in New York. “There are hardly any incentives for people to switch, except maybe for the price, but some cents don’t make a big difference.” Proof positive: Two years ago, Amazon launched a free service for downloading mp3 files and also started selling files at a cheaper price than iTunes, but even that business model has only been able to take a market share of between 5% to 15% from iTunes, Gandhi says.

Other big players are taking Spotify’s growth seriously, too. Spotify’s launch in the U.S. is particularly galling since Ek’s R&D team in Stockholm is trying to make its streaming available on all portable devices:
Google
‘s Android phone is running a beta version and the iPhone is expected to host the Spotify software very soon. Ek already has a beta version on his iPhone. But Spotify doesn’t expect to spend thousands on marketing its product. It hopes to replicate its word-of-mouth and viral approach, which has lured millions of users in the U.K., France, Spain, Sweden, Finland and Norway.

Still, analysts believe Spotify’s success in the U.S. is far from a shoo-in.Spotify has signed deals with record companies in Europe but it now has to do the same all over again in the U.S. Artists usually license their rights to one record company for the North American market and to another for Europe and the rest of the world. So now Spotify has to renegotiate all the deals. It has already spoken to the major labels, but it hasn’t signed a single deal yet.

Another looming threat:
Microsoft
is launching a very similar music streaming service later in July, a service that also allows users to download the music, something Spotify still won’t allow members to do. “A lot depends on the deals Spotify is able to sign in the U.S. with the record companies,” says Dan Cryan, a digital media analyst with Screen Digest in London. Cryan, who has been monitoring Spotify’s ads since last November, adds: ” Spotify pays labels on a per-track basis, and funds that using a mix of advertising and subscriptions. But at the moment it’s only playing one ad every four songs, and our research suggests that most of the ad slots aren’t sold.”

One further problem: “Spotify has had an explosion in popularity,” says Cryan, “which means that its costs have increased dramatically. But there are still insufficient compelling reasons given to users to sign up for the premium subscriptions.”